Macroeconomic Effects Research Articles

The Macroeconomic Effects of Monetary Policy and Government Expenses in Response to Covid-19: Evidence from Saudi Arabia

The purpose of this paper is to test the effectiveness of the interaction between monetary and budgetary policies during the Covid-19 crisis in Saudi Arabia. To this end, we use the Markov regimes technique to take into account change in regimes of the two policies. We adopt the SVAR modelling of sign restrictions to test the joint effect of a stagnation in tax revenues and a 1% increase in government spending over a time horizon of four periods identified as tax shocks during the Covid-19 period. The results of impulse response tests show that this shock did not lead to an improvement in industrial production. The results show tax dominance by financing state resources to compensate for the burden of government expenditure. If the central bank has raised the interest rate to anchor inflationary expectations, it will in turn have negative effects on economic activity as measured by the industrial production index. This scenario coincides with the second regime of the monetary rule, where the central bank acts in response to expected inflation.

Macroeconomic responses to financial stress shocks: Evidence from the US and the Eurozone

This paper investigates the macroeconomic effects of an unexpected financial stress shock in the United States and the Eurozone, focusing mainly on the effect on unemployment and the response of monetary policy. First, we estimate Impulse Response Functions (IRFs) based on a Structural Vector Autoregression (SVAR) model with short-run restrictions according to economic theory. Next, we perform panel data analysis shedding light on the factors that affect unemployment in the two regions. Our findings indicate a significant impact of financial stress shocks on the macroeconomic environment, but with different policy responses from the Federal Reserve (Fed) and the European Central Bank (ECB). The impact of higher financial stress on economic activity and employment is negative in both regions, but the duration of the impact on unemployment is shorter in the US, suggesting a quicker recovery in the US labor market compared to the Eurozone. The faster recovery of the US labor market is primarily due to the superior institutional and regulatory performance in the US. These findings provide policymakers with valuable lessons about the importance of continuous monitoring and quick action to mitigate the negative effects of financial instability on economic activity.

Macroeconomic effects of climate change: Evidence from Canadian provinces

We study the long-term macroeconomic effects of climate change across ten Canadian provinces between 1961 and 2017. Following Kahn et al. (2021a), our econometric strategy links deviations of temperature and precipitation (weather) from their multi-decade historical rolling averages (climate) to various province-specific economic performance indicators at the aggregate and sectoral levels. We show that climate change (proxied by a series of weather shocks) has a long-lasting adverse impact on real output in various Canadian provinces and economic sectors. Adaptation reduces the income losses but cannot offset them entirely. Moreover, in contrast to most cross-country results, our within-country estimates suggest asymmetrical growth effects from precipitation and temperature anomalies. Specifically, persistently higher-than-normal precipitation is associated with lower long-term GDP growth, whereas the effect of below-than-normal precipitation is not statistically significant. As regards temperature, while extended periods of cold spells (temperature persistently below historical norms) is detrimental to growth (though less likely in the future), Canada is not benefiting from a warmer climate as often argued in the literature.

Hidden price increases, product downsizing, and shrinkflation: a post-Keynesian macroeconomic perspective

Abstract This article takes a macroeconomic view of the industrial practice of marginally reducing the size/weight of goods or altering the content of goods or services without passing on the cost savings in prices. Although seldom a subject of academic study, this practice has come in for renewed attention with the recent return of inflation because it is one way of containing prices. Variously referred to as “hidden price increases,” “product downsizing,” or “shrinkflation,” it is part of a microeconomic strategy that has macroeconomic effects on both income distribution and consumer well-being.

The Macroeconomic Implications of Automation and AI on Labor Markets and Employment

Artificial intelligence (AI) and automation are developing at an astounding rate, changing labor markets with significant macroeconomic ramifications. This study investigates the macroeconomic effects of automation and artificial intelligence (AI) on labor markets and employment, with a particular emphasis on pay inequalities, employment patterns across industries, job displacement, and shifts in skill demand. AI and automation are changing labor markets, creating new possibilities in tech-driven, high-skilled positions like digital security, data analysis, and AI engineering, but also displacing regular, manual work. Through econometric modeling and industry-specific analysis, this study finds strong relationships between automation levels and changes in employment measures, demonstrating how the advantages of automation are not uniformly dispersed and frequently exacerbate already-existing economic disparities. In order to address these tendencies, the analysis recommends legislative actions that promote fair access to education and training, allowing employees to adjust to the rapidly changing technological environment and guaranteeing that the financial benefits of automation are distributed widely throughout the workforce. These revelations offer a thorough grasp of how automation will influence job markets in the future.

Macroeconomic and Fiscal Consequences of Climate Change in Latin America and the Caribbean

Abstract Climate change poses a significant challenge for Latin America and the Caribbean, exposing its vulnerabilities to hydrometeorological shifts and rising temperatures that threaten economic stability. We examine the macroeconomic consequences of climate change through the lens of six distinctive country cases. Our results suggest that compensating for the drag on economic growth caused by climate change would require public and private investments of 5.3 % of GDP to 10.9 % of GDP per year. Faced with existing fiscal constraints and restrictive financial conditions, we explore the macrofiscal implications of an investment push in line with the Nationally Determined Contributions (NDCs). Our results suggest that front-loaded public adaptation investments would improve growth over the medium term, although not fully compensating for climate losses. However, resulting public debt trajectories would become untenable in most countries. We find that a key factor for a fiscally sustainable NDC investment push is the financial costs that countries face when issuing sovereign debt. Debt sustainability could be significantly improved if countries could finance their climate investments at lower cost or concessional terms.

The Energy Transition and Its Macroeconomic Effects

Abstract The energy transition will have profound and varying effects across the globe. We provide an evidence-based qualitative analysis and assess how clean technologies are evolving – mainly wind, solar and electric vehicles – and the challenges and opportunities the transition poses for fossil fuel and metals and minerals producers in the short and long term. We describe the likely macroeconomic consequences of the energy transition and identify the countries that are most positively and negatively exposed. A small number of fossil fuel-producing countries are likely to be severely hit. Meanwhile, a concentrated group of minerals producers should experience large net benefits. Fuel importers – that is, most of the world – should benefit to varying degrees.

High-dimensional macroeconomic stress testing of corporate recovery rate

We investigate macroeconomic stress testing frameworks for corporate bond recovery rate analysis using machine learning techniques. In doing so, we simulate the macroeconomic effect of a broad range of 182 macroeconomic variables extracting key factors with methods such as (sparse) principal component analysis and sparse group least absolute selection and shrinkage operation (LASSO). Using the adverse stress testing scenario from the US Federal Reserve as the benchmark, we demonstrate that our least squares-support vector regression model produces sensible and potentially valuable risk measures such as value-at-risk and conditional value-at-risk for recovery rates during periods of macroeconomic stress.

A macroeconomic perspective on taxing multinational enterprises

We develop a general-equilibrium model to study the macroeconomic consequences of international profit shifting by multinational enterprises (MNEs). In our model, MNEs shift profits by exploiting intangible capital transfer pricing rules, which makes intangible investment more attractive and leads to higher output at home and abroad. We use the model to quantify the effects of two reforms proposed by the OECD: (i) reallocating MNEs’ profit tax bases to the countries where they sell their products; and (ii) a minimum global corporate income tax. Both reforms would reduce profit shifting substantially, but (i) would reduce global output whereas (ii) would have little macroeconomic impact. The reforms’ distributional implications would also be important. In high-tax countries, tax revenues would increase more than output declines, raising gross national income and enabling redistribution that could offset lower wages. In contrast, output and tax revenues would both drop in low-tax countries, significantly reducing national income.

The impact of central bank digital currency on macroeconomic dynamics: A DSGE analysis

This study investigates the impact of Central Bank Digital Currency (CBDC) on macroeconomic fluctuations under various external shocks, expanding the research on macroeconomic effects of CBDC issuance. We develop a dynamic stochastic general equilibrium (DSGE) model to examine the effects of different external shocks on the macroeconomy under three scenarios with varying CBDC rules. Our analysis reveals that, in the presence of CBDC, macroeconomic variables are generally more volatile after exogenous shocks than in the absence of CBDC, while highlighting the crucial role of monetary policy in stabilizing the macroeconomy. Liquidity and substitution effects are identified as main drivers of the results. These findings offer new insights into the welfare improving effect of interest-bearing CBDC, carrying significant implications for the effective implementation of monetary policy.

The Interconnectedness of Earnings Management, Corporate Governance Failures, and Global Economic Stability: A Critical Examination of the Impact of Earnings Manipulation on Financial Crises and Investor Trust in Global Markets

This study critically examines the interconnectedness of earnings management, corporate governance failures, and their impact on global economic stability and investor trust. Focusing on the Enron (1993–1995) and Wirecard (2015–2019) scandals, the research identifies key financial and governance indicators that contributed to these collapses, including CEO duality, weak board oversight, and manipulated financial reporting. Data for the analysis were drawn from corporate financial reports, macroeconomic indicators sourced from the World Bank, and stock market data from MarketWatch. Financial ratio assessments and regression models reveal a statistically significant negative relationship between GDP growth and abnormal returns for Enron (p = 0.014), while inflation had a strong positive impact on abnormal returns in both cases (p < 0.001). Time series analysis was applied to assess the macroeconomic consequences of corporate collapses on global financial markets. The findings demonstrate how declining GDP growth and rising inflation amplify market responses to governance failures. Recommendations include enhancing corporate governance frameworks, intensifying regulatory enforcement, and fostering global regulatory cooperation to safeguard financial markets and restore investor trust.

Examining the Relationship Between Macroeconomic Indicators and Stock Market Development in Morocco

The literature is still debating the key macroeconomic variables influencing the stock market development. This paper attempts to provide an empirical study to identify the macroeconomic conditions required for the stock market development in a developing country, in this case, Morocco. The goal is to determine whether macroeconomic variables can improve Moroccan stock market development. The purpose of this study, which covers the period 1996-2020, is to determine the macroeconomic factors that contribute the Moroccan stock market development. It examines the impact of economic growth, banking sector development, stock market liquidity, foreign direct investment and macroeconomic stability measured by the Barro’s Misery index. The autoregressive distributed lag approach (ARDL) was estimated, to get both the short and long run coefficients of the macroeconomic variables that determine Moroccan stock market development. The results reveal that stock market liquidity, banking sector development and foreign direct investment effect positively Moroccan’s stock market development, but macroeconomic stability effects it negatively. While the economic growth does not impact it, whether for the short or long run. There have been no relevant studies that have focused on the macroeconomic determinants of the Moroccan stock market in the short and long terms, despite the fact that theoretical and empirical literature offers diverse perspectives on which factors can determine stock market development. By examining the macroeconomic variables that contribute to Moroccan stock market development and introducing the misery index to assess the effects of macroeconomic stability, this study seeks to enrich the literature.

Economic implications of a phased‐in EV mandate in Canada

AbstractCanada plans to phase out internal combustion engine vehicle (ICEV) sales in favour of electric vehicles (EVs) by 2035 as part of its climate policy. Herein I examine the economic implications of a phased‐in electric vehicle mandate. I show using partial equilibrium analysis that when both types of cars are available, auto companies will overproduce electric vehicles and earn scarcity rents on internal combustion engine vehicles that partially offset the revenue loss on electric vehicles. I then present a numerical general equilibrium model of the Canadian economy to assess the overall macroeconomic consequences of the policy. The results depend critically on the assumed pace at which electric vehicles achieve cost parity with internal combustion engine vehicles on a quality‐adjusted basis. An electric vehicle mandate will have manageable economic consequences if technology improves so rapidly that the mandate is unnecessary. If the mandate outpaces achievement of cost parity the economic consequences can be severe and would likely cause the auto manufacturing sector to shut down. The cost per tonne of emission reductions are at least 10 times the Canadian carbon tax rate while the mandate is binding. The analysis provides insight into why automakers have been willing hitherto to develop and sell electric vehicles even though they currently lose money on them.

Macroeconomic impact of forced migration on Lebanon with a focus on labor market dynamics and policy strategies for sustainable economic growth

This article explores the profound macroeconomic consequences of forced migration on Lebanon's economy, with a specific focus on labor market dynamics. Drawing from extensive research and analysis, the study examines the factors driving migration, its impacts on the labor market, and the resultant economic challenges. It delves into the wage disparities, employment rates, and the informal sector's expansion due to the influx of migrants. The article also evaluates existing public policies and proposes strategic interventions aimed at fostering migrant integration and promoting sustainable economic growth. By addressing these critical issues, the forced aims to provide comprehensive policy recommendations to mitigate the adverse effects of forced migration and enhance Lebanon's economic resilience.

Heterogeneous biased expectations of young and old individuals: macroeconomic effects and policy implications

Abstract This paper examines the effects of heterogeneous biased expectations between the young and old on business cycles and explores its policy implications. Empirical findings reveal that individuals, particularly the young, can have more optimistic or pessimistic views about the future state of the economy compared to the data-generating measure. This study relates these results to the learning-from-experience literature, which suggests that individuals, particularly the young, place greater weight on recent observations when forming their expectations. Incorporating household weighting schemes into a life-cycle learning model, I show that household sensitivity to recent observations amplifies the effects of economic shocks. However, the amplification effects become less extensive as the population ages due to the lower sensitivity of the old. My simulation results indicate that a 10 percentage point increase in the old population ratio leads to a 16 percent decrease in output volatility. Regarding policy implications, this paper suggests that the government spending multiplier declines by approximately 10 percent when the old population ratio rises by 10 percentage points due to weak amplification effects. Moreover, the weakened output effects deteriorate the welfare of the population, particularly that of the young.

Oil Price and Long-run Economic Growth in Oil-importing Developing Countries

The recent spikes in oil prices are a significant setback for the world economy, which has already faced multiple challenges due to the COVID-19 pandemic. This is particularly concerning for developing countries as maintaining a sustained growth in real GDP is crucial for lifting their population out of poverty. While the short-run negative macroeconomic effects of a spike in oil prices are well established in the context of the developed world, the long-run growth effect has received little attention, especially in developing countries. Using the World Bank's development indicators database covering the period 1990 to 2020, this study aims to investigate the oil price-growth nexus in low and middle-income net oil-importing countries to shed light on how oil price increases could be a challenge for sustainable development. Specifically, we first set up a theoretical model to establish the relationship between growth in output per capita and oil price. Following the traditional growth regression approaches, we empirically estimate the causal effect of growth in oil prices on the economic growth of 65 net oil-importing developing countries using fixed effect panel IV regression methods. The empirical results confirm statistically significant negative effects of oil prices, indicating that a higher oil price reduces long-run economic growth in oil-importing developing countries. Our results on the other determinants of growth are consistent with the existing empirical growth literature. Oil-importing developing countries, therefore, must allocate resources towards alternative domestic energy sources, in addition to pursuing fuel efficiency and conservation strategies, to mitigate the negative effects of oil price fluctuations on their long-run economic output and uphold sustainable development.

Credit Supply or Demand? The Changing Role of Structural Market Forces in Bank Lending*

ABSTRACT Recent crises have shown that disruptions in credit markets can have serious macroeconomic consequences. This paper aims to assess the structural drivers of the bank lending market to non-financial corporations using the structural VAR methodology in a small, open, and bank-based euro area economy – Slovakia. The results show that credit demand shocks (loans demanded by firms) are at least as important as credit supply shocks (loans supplied by banks) in the lending market, and that this importance changes over the cycle. These findings have important policy implications, as responding to these shocks may require different policy measures.

Correction to: The Macroeconomic Effects of EU Regional Structural Funds

Correction to: The Macroeconomic Effects of EU Regional Structural Funds

Possible development path for agricultural economic and trade cooperation in FTAAP: A numerical simulation

Exploring the path of developing agricultural economy and trade cooperation in the Free Trade Area of the Asia Pacific (FTAAP) is of great practical significance for deepening economic integration in the Asia Pacific region and strengthening regional agricultural development. This paper proposes three feasible paths based on RCEP, CPTPP, and the integration of RCEP and CPTPP to establish FTAAP. Moreover, a dynamic computable general equilibrium model of global trade is used to simulate the macroeconomic effects and the agricultural effects represented by China in forming FTAAP under these three paths. The research results show that six common policy nodes will promote macroeconomic growth in participating countries, and the effects of the in-depth implementation of RCEP and CPTPP will be greater than those of the initial implementation. Due to the broader base of participating economies and the higher level of openness, establishing FTAAP under Path 3 will yield greater macroeconomic effects and agricultural effects. Therefore, the path based on the integration of RCEP and CPTPP is an optimal selection for economic and trade cooperation of agriculture in FTAAP. All parties should actively overcome the obstacles to forming FTAAP and provide a stable internal and external industrial development environment for regional agricultural economic and trade cooperation.

R&D expenditure and its macroeconomic effects: A comparative study of Israel and South Caucasus countries

The impact of research and development (R&D) expenditure is crucial for understanding contemporary economic development strategies. This study investigates the relationship between R&D spending as a percentage of GDP and economic growth, focusing on the South Caucasus countries (Azerbaijan, Georgia, and Armenia) and Israel, which is notable for its substantial R&D expenditure (5.71% of GDP in 2020). The objective is to evaluate the impact of R&D expenditure on economic development through the application of rigorous empirical methods. By employing a quantitative approach, this study aims to offer a detailed analysis of the impact of R&D investment on economic growth across various countries. Ordinary least squares (OLS) regression analyzes the association between R&D expenditure and GDP levels. Granger causality tests are utilized to investigate the causal relationships. The results demonstrate a significant positive relationship between R&D expenditure and GDP across all studied countries. Furthermore, the analysis reveals that GDP growth stimulates increased R&D investments in Azerbaijan and Armenia, as evidenced by Granger causality tests. To sum up, this paper underscores the critical role of R&D spending in driving economic development and highlights the necessity for policy initiatives focused on strengthening R&D frameworks.